Category: Crypto Taxes

Tax Challenges & Opportunities of a Crypto IRA 

Since the Genesis block was mined in 2009, Bitcoin and other cryptocurrencies have gained in popularity with retail and institutional investors; likely in part due to its potential for substantial returns.  

It may come as a surprise that despite its $1 trillion market cap to date, only 20% of Americans own cryptocurrencies. A recent Coinbase study revealed that “67% of Americans agree that the financial system needs major changes or a complete overhaul.” With the majority of Americans unsatisfied with the current financial system, why haven’t more Americans invested in an alternative solution like crypto?  

One possible reason that the average American has not invested in crypto yet is the perceived crypto tax hurdles. Despite the confusion, understanding how crypto taxes work “might be easier to do than you think.” Similar to stocks and bonds, non-IRA crypto gains generally yield a capital gains tax of up to 20% as of 2023. However, there are a number of strategies to consider that could positively affect your tax obligations, such as investing within a crypto IRA like a Bitcoin IRA.  

Crypto IRA versus non-IRA crypto investing 

1. Capital gains taxation 

Did you know that you can avoid taxes on profitable crypto trades in a Traditional or Roth crypto IRA? BTC has seen significant growth in its brief lifespan, so you could be on the hook for significant capital gains taxes if you invest outside of an IRA.  

Hypothetically, if you wisely contributed the maximum amount allowed for someone 50 years or under each year until retirement, you could be looking at sizeable earnings from your initial investments within a Bitcoin IRA. Let’s say you purchased 1 Bitcoin on May 1, 2013. At that time the price of 1 whole Bitcoin was $116.75. If you then sold that Bitcoin on March 1, 2023 you would have earned $1,108,470.29.   

For the average married earner you would have paid 20% capital gains tax on your $ earnings. That means that in 2023 you could have paid over $200,000 on those earnings.  

However, if you used an IRA to make that same investment, you would never have to pay capital gains taxes.   

 

 

Differences between Roth IRAs and Traditional IRAs   

Let’s breakdown the difference between investing in a Roth versus a Traditional IRA when holding Crypto. 

Roth IRAs  are funded with post-tax contributions. With a Roth IRA, you may be able to avoid hefty taxes in the future because you paid the taxes up front. Withdrawals taken at retirement age are typically tax free.   

Traditional IRAs are funded with pre-tax dollars, so any income made on your crypto investment will be taxed at your income tax rate upon withdrawal at retirement age. 

2.Buy-sell tracking 

Non-IRA crypto investing requires you to track every trade that you make and report your gains and losses to the IRS. You can imagine how tiresome it might be to report on gains and losses for every trade you make when you convert your crypto. It might even make you trade less to avoid the accounting work. 

One of the benefits to crypto IRA investing is that you are not required to track your trades. You’re free to focus on “buying low and selling high” as the infamous investors saying goes. A crypto IRA allows you to re-invest your gains exponentially so that one mistake doesn’t cost you valuable time and money in the long run.

3. Unlimited tax-advantaged re-investing

That brings us to our final crypto IRA benefit. You can buy and sell your crypto assets as many times as you want within an IRA and not be taxed. Outside of an IRA, you would owe capital gains taxes on any gains from the sale or exchange of crypto. But with a crypto Roth IRA, you typically pay zero taxes when you take qualified distributions and with a crypto traditional IRA there are typically no taxes until you take distributions at retirement age. That means you can re-invest your contribution amount within your IRA and use the infamous “buy low, sell high” technique to maximize your retirement savings.

Conclusion 

Self-directed crypto IRAs present growth opportunities that non-IRA crypto investing just simply cannot offer. They allow you to avoid capital gains taxation and time-consuming trade tracking so you can focus on investing.  

Depending on your unique strategy, retirement goals, and the market, Traditional and Roth Crypto IRAs have the potential to boost your returns while having their own pros and cons.  

If you’re ready to take advantage of Crypto IRA investing, with the added advantage of a secure and user-friendly platform, consider partnering with a reputable provider like BitcoinIRA1 . We offer a dedicated customer support team to help you navigate the idiosyncrasies of Crypto IRA investing, as well as educational content, email news updates, and more at no additional cost. Diversify your financial future and open an account today!   

 

1.Bitcoin IRA is a platform that connects consumers to qualified custodians, digital wallets and cryptocurrency exchanges. The company is not a custodian, is not a digital wallet and is not an exchange. The information provided in this article is for educational purposes only. We encourage you to consult an adviser or professional to determine whether Bitcoin IRA makes sense for you.   

Investing in cryptocurrency for the long term can yield significant returns for investors who exercise patience. As virtual currencies are still in their early stages, they have the potential for continued growth in the coming years. However, it is important to weigh the pros and cons of holding cryptocurrency for an extended period. These include advantages such as tax benefits, but also risks associated with investments. It is advisable to consult a financial adviser before making any investment decisions to determine if cryptocurrency aligns with your investment goals.

Day Trading Cryptocurrency Vs. Holding Cryptocurrency Long Term

When considering investment options in the cryptocurrency market, it is crucial to carefully analyze the distinctions between day trading and long-term holding. Day trading involves executing short-term trades within a single day, emphasizing swift buying and selling. For novice investors, day trading can pose substantial risks due to the inherent volatility of cryptocurrency prices and market trends. On the other hand, long-term holding is a strategy that involves retaining specific cryptocurrencies for extended periods, often spanning multiple years. Opting for long-term holding has the potential to mitigate risk by leveraging the benefits of sustained market growth.

Benefits of Holding Cryptocurrency Long-Term

While holding cryptocurrency for the short term offers enhanced liquidity, there are notable advantages to keeping crypto assets for the long term, including increased stability and valuable tax benefits. Determining whether cryptocurrency is a suitable long-term investment depends on your individual needs and objectives.

Less Volatility

Holding cryptocurrency for the long term provides investors with the advantage of increased stability. Long-term trading is characterized by lower volatility, as it prioritizes gradual growth instead of capitalizing on short-term price fluctuations. Generally, both stocks and cryptocurrencies exhibit reduced volatility over an extended period, making it an appealing prospect for individuals seeking to avoid trading based on momentary price swings.

Tax Advantages

As per the IRS guidelines, in order for a cryptocurrency sale to be classified as a long-term gain or loss, it must be held for a period exceeding one year. Conversely, if a cryptocurrency is sold within a year of its purchase, it is generally considered a short-term transaction. One significant distinction between long-term and short-term holding of cryptocurrency is the greater range of benefits associated with the former. Holding cryptocurrency for an extended period allows individuals the opportunity to be taxed at a lower rate and be subject to long-term capital taxes, providing advantageous tax considerations.

Less Stress

Maintaining cryptocurrency holdings over an extended period has the potential to alleviate stress. When engaging in long-term cryptocurrency holding, the need to monitor its daily performance diminishes, as it becomes less susceptible to short-term volatility.

Drawbacks of Holding Cryptocurrency Long Term

Before deciding to hold cryptocurrency for the long term, contemplate the likely drawbacks, such as decreased liquidity and investment risk against the potential benefits.

Less Liquidity

One crucial factor to consider when making investments is the impact on liquidity. Liquidity refers to the ease with which assets can be converted into cash. Opting for long-term investments reduces liquidity, making it more challenging to access cash on short notice. Before making any investment decisions, it is prudent to assess the adequacy of your emergency fund. An emergency fund should ideally cover three to six months’ worth of expenses, ensuring that unforeseen events can be managed without needing to tap into long-term investments.

Investment Risk

Cryptocurrency represents a relatively new investment opportunity compared to stocks, introducing investors to a heightened level of risk due to the presence of numerous unknown variables. As a whole, the future value of cryptocurrencies is yet to be determined.

Security

Over time, there is a possibility of forgetting crucial information such as account keys or passwords. To ensure uninterrupted access to your account, it is advisable to collaborate with an account holder that provides robust customer service. It is essential to seek out an account holder that offers exceptional security features to protect against hackers and potential theft.

How to Know Whether Holding Cryptocurrency Long Term is Right for You

Holding cryptocurrency for an extended period can be a strategic decision for individuals seeking long-term portfolio diversification or more daring investment avenues. With the rapid expansion of cryptocurrencies, long-term holding provides believers with the potential to capitalize on significant financial growth.

You’re Planning Your Retirement

Including a carefully calculated portion of cryptocurrency in a robust retirement account promotes asset diversification. Companies like Bitcoin IRA enable customers to hold cryptocurrency within a designated crypto individual retirement account (IRA). An IRA is a type of account that is commonly classified into two categories: Roth IRA and traditional IRA. A Roth IRA entails using after-tax dollars, whereas a traditional IRA involves utilizing before-tax dollars.

You Believe in Crypto’s Future

Cryptocurrency has grown exponentially over the years. Virtual currencies offer a new and exciting opportunity given the understanding that the market has yet to reach its full potential.

You’re Looking to Diversify

Investing in crypto can improve a portfolio’s diversification and reduce risk exposure. It’s often recommended to have less than 5% of a portfolio placed into crypto.

What Is the Best Cryptocurrency To Invest In Long Term?

Choosing the most suitable cryptocurrency for a long-term investment is contingent upon various factors, encompassing personal preference and risk tolerance. Prior to making any investment decisions, it is advisable to consult with a financial professional to gain a more comprehensive understanding of the available options. In general, Bitcoin, Ethereum, and Litecoin are recognized as three of the leading choices for long-term investing.

Bitcoin

Bitcoin (CRYPTO: BTC) is widely recognized as the pioneering decentralized virtual currency. It boasts one of the highest market capitalizations (market caps) among all cryptocurrencies. Market cap is determined by multiplying the current coin supply by its price. Bitcoin retains its popularity among both novice and seasoned cryptocurrency investors due to its consistent upward trajectory in terms of price and widespread recognition.

Ethereum

Ethereum (CRYPTO: ETH) was launched in 2015 and has emerged as one of the most valuable cryptocurrencies in the market. Ethereum’s native cryptocurrency is called Ether, and it operates on a blockchain platform, serving as a decentralized virtual currency. Ethereum exhibits significant potential for long-term price growth.

Litecoin

Litecoin (CRYPTO: LTC) was initiated slightly over a decade ago, positioning itself as one of the earliest open-source altcoins. An altcoin denotes a coin that is distinct from Bitcoin. The cryptocurrency was specifically engineered with a strong emphasis on achieving remarkable transaction speed.

Cryptocurrency Offers Long-Term Growth Opportunity

In general, retaining cryptocurrency offers daring investors the opportunity to pursue long-term growth. The act of holding virtual currencies over an extended duration presents enticing advantages, spanning from favorable tax benefits to reduced stress. Prioritize assessing your risk tolerance to ensure comfortable and appropriate investment decisions.

Frequently Asked Questions

Q: Should I hold my crypto long-term?

A: Holding for the long term can prove a profitable strategy for individuals focused on future growth.

Q: Can you put cryptocurrency in a Roth IRA?

A: Yes, it’s possible to place cryptocurrency into a specifically created crypto Roth IRA account. Cryptocurrencies are not commonly accepted in typical retirement accounts. Fortunately, companies such as Bitcoin IRA allow individuals to hold crypto in a designated crypto retirement account.

Q: When should I sell my crypto?

A: The decision about when it’s best to sell crypto remains a personal choice, but like most assets, it’s recommended to sell high and buy low.

The complexity of tax laws can make it challenging to determine your crypto tax obligations. Both newcomers and seasoned investors may require assistance in understanding their responsibilities. Failure to report your crypto activity on your tax return or pay taxes on time can result in a substantial tax bill. To help you decide whether you need a crypto tax accountant after buying, selling, or exchanging crypto, we’ve created a guide.

 

Do You Have to Pay Taxes on Crypto?

According to the IRS, crypto is classified as property, and any profit you make from selling, exchanging, or trading it is subject to taxes. The amount of tax owed depends on your annual income, filing status, and the duration of time you held the crypto before selling or exchanging it.

When you sell, exchange, or trade crypto that you have owned for less than one year, you are taxed at the short-term capital gains rates, which are equivalent to ordinary income rates. However, if you exchange or trade crypto that you have owned for more than one year, the taxes owed are based on the long-term capital gains rates, which are lower than short-term rates.

 

Benefits of a Crypto Tax Accountant

Crypto taxes can be complex, and failure to report crypto activity on your tax return or identify taxable transactions can result in penalties. To better understand your tax obligations, you may benefit from consulting a crypto tax accountant, who can assist you with reporting your crypto activity and filing your tax return.

 

Crypto Expertise
A crypto tax accountant possesses the expertise to deal with complex crypto transactions and distinguish between taxable and non-taxable ones. They can also offer valuable knowledge about crypto regulations and tax laws.

 

Ease
If tracking your crypto activity is a hassle due to frequent selling, trading, or swapping, a crypto tax accountant can analyze your activity and identify taxable transactions, ensuring you remain compliant with IRS reporting rules.

 

Savings
Additionally, a crypto tax accountant may suggest strategies to reduce the taxes you owe. For instance, selling crypto after holding it for a year can result in a lower tax rate, and selling another crypto that’s performing at a loss can help reduce taxes if you anticipate realizing crypto profits.

 

Understanding Crypto Tax Accountant Services

Crypto tax accountants can assist you in understanding your tax obligations regarding cryptocurrency. Apart from aiding clients in preparing their individual and corporate tax filings, they offer other valuable services.

Through tax planning, a crypto tax accountant can help you structure transactions to minimize your tax liability. They can also provide audit defense services, representing you with the IRS if necessary. Moreover, a crypto tax accountant can help ensure that you remain compliant with changes in regulations.

 

Crypto Tax Accountant: Factors to Consider

Despite crypto having been around for years, not every accountant is familiar with its taxation rules. Crypto transactions can be voluminous and complicated. An experienced crypto tax accountant can assist you in navigating through complex crypto activity.

 

Examine Past Experience
A reputable crypto tax accountant should have a track record of delivering quality work. You can check other clients’ online reviews to gauge their experience. Moreover, if the accountant holds a professional license, you can verify with the state whether they are in good standing.

 

Understand Taxable Events
While most crypto activity is taxable, there are some exceptions. For instance, you may pay less or no tax when you sell Bitcoin in a crypto IRA or donate crypto to a nonprofit. However, if you sell, swap, or exchange crypto at a gain, you most likely will owe tax.

The crypto tax accountant should have a good understanding of which crypto transactions are taxable and which ones are not. If they don’t know the difference between taxable and nontaxable crypto, you may unexpectedly owe tax.

 

Discuss Tax Strategy
A crypto accountant should be knowledgeable about tax strategies that can help reduce your tax burden. For example, they may suggest opening a crypto IRA, offsetting crypto gains with crypto losses, or waiting to sell crypto until you have owned it for a year. A crypto accountant can be a valuable resource to minimize your crypto taxes.

 

Document Preparation
Even if you use a crypto tax accountant to prepare your returns, you still need to monitor your crypto activity and retain copies of any reports you receive. Ensure that you retrieve any documents that you’ve given to your crypto accountant to prepare your return and store them in a secure location.

 

Engage in Frequent Conversations
You do not have to wait until tax time to communicate with your accountant. A crypto tax accountant who is familiar with changing tax laws and regulations can provide valuable information at any time of the year.

 

Why Hire a Crypto Tax Accountant?

Having a crypto tax accountant can be beneficial if you engage in crypto activity. As seasoned tax professionals, they can help you comprehend your tax responsibilities and what you should report on your return. If you are investing for retirement, they can also offer advice on contribution limits and withdrawals. When you collaborate with a crypto tax accountant, they can provide tax strategies that align with your financial situation.

 

 

Frequently Asked Questions

Q: Can you face consequences for not reporting crypto on taxes?

A: Yes, if you neglect to report crypto sales, exchanges or trades on your tax return, you may incur penalties and interest.

 

Q: Is it necessary to hire an accountant for crypto?

A: Hiring a crypto tax accountant can be advantageous when filing your tax return. However, if you can keep track of your crypto activity and are confident in filing your taxes on your own, you may not require the services of a crypto tax accountant.

 

Q: Do you need to report crypto transactions under $600?

A: Yes, you must report crypto transactions under $600 if you experience a gain or loss, which constitutes a taxable event.